Equity Valuation

While business valuation may consider the whole enterprise, equity valuation focuses on what shareholders own after all debts and other claims are paid.

Analysts use several methods. They may estimate the value of the whole business and subtract its net debt to arrive at equity value. They may value the shares directly by discounting expected dividends or free cash flow to equity. Or they may use market multiples, such as the price-to-earnings ratio, to compare the company with similar ones.

For example, if an analyst estimates that a company's operations are worth 5 billion and it has net debt of 1 billion, the equity is worth 4 billion. With 200 million shares, that suggests a value of about 20 per share.

Investors use equity valuation to judge whether a share is cheap or expensive compared with its market price. If the estimated value is well above the current price, the share may be undervalued. Because valuations depend on assumptions about future growth, profits and risk, different analysts often reach different conclusions about the same company.